Chapter 8 Plan for Financial Security

Why Save 8.1 Benefits of Saving Saving Strategies Automatic Saving

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Savings Institutions and Accounts 8.2 Savings Institutions Savings Accounts

Save with Safety 8.3 Savings Options Government Bonds

Simple and Compound Interest 8.4

How is the interest calculated? Simple Interest—interest paid only on initial amount of deposit. Compound Interest—interest paid at set intervals and added back to principal.

If simple interest is used, there is no compounding: Interest = Principal x Rate x Time (Years) $30 = $1000 x.03 x 1 New Principal after 1 year $1030

If compound interest is used, occurs semiannually First 6 months' interest: $1000 x.05 x 6/12= $25.00 Second 6 months' interest: + $1025 x.05 x 6/12= $25.63 Total annual interest= $50.63

If compound interest is used, occurs quarterly $100 at 5% (3/12) 1 st - $100 x.0125 =$ nd - $ x.0125=$ rd - $ x.0125=$ th - $ x.0125=$1.30 Total annual interest=$5.10

If compound interest is used, occurs monthly $400 at 5% (1/12) 400 x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = x.0042 = 1.76 $ $20.63 Total Interest

If compound interest is used, occurs daily $100 at a rate of 3% 1 year $ Amount x Factor = Interest $100 x 1.03 = $ years $100 x = $ COMPOUND INTEREST TABLE Yea r 3%6%10%